Redmond sees reduced revenue in almost all of its divisions. Add that to the …

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As the last round of quarterly reports rolled in, Apple's didn't look so hot—until they were followed by mediocre results from Microsoft and an absolute disaster for Sony. This time around, with everyone's expectations lowered by months of economic turmoil, Apple's results looked pretty good, but Microsoft put a quick stop to any speculation that the good news for Cupertino was a general sign. The economy hit Microsoft hard, knocking profits down by nearly a third from where they were a year ago, with nearly every division of the company seeing a drop in revenue. After these results, I fear for Sony.

Microsoft typically sees a small but substantial drop from the holiday quarter, and the trend held this time around. Revenue overall wasn't in terrible shape, as the $13.7 billion pulled in was only six percent off last year's figure. But the money didn't translate to nearly as much profit, with earnings-per-share coming in at 33�, down 33 percent from a year ago (or the holidays; take your pick). Six cents of that drop were caused by one-time charges, some related to the layoffs announced at the end of last quarter, and the majority coming from investments gone sour with the economy.

Microsoft's third quarter earnings

Those six cents still leave a significant drop in earnings to be accounted for, however, and the contributors come from nearly every division in the company. The client division saw its revenue drop by a bit more than $600 million, with income down by almost the same amount. The trend of the PC market towards netbooks, which either run Linux or a low-cost version of Windows XP, undoubtedly hit this division hard. With Windows 7 apparently progressing well, however, the light may be visible at the end of the tunnel here, provided the company can convince netbook makers to pay more for the improvements it brings (and consumers are interested in its netbook version).

Online business continues to be a thorn in Redmond's side, with revenue down by about $220 million, and the losses more than doubling to $575 million. Entertainment and Devices managed to hold its revenue relatively steady (it dropped less than two percent), but it came at a price, as the division swung from over $100 million in income to $31 million in the red. The business division saw revenue drop by $225 million, while profits dropped by $250 million.

It's important to emphasize that, even with dropping profitability, Business and Client are still very profitable ventures for Microsoft, bringing in $2.9 billion and $2.5 billion, respectively. Microsoft could absorb the losses of nine of its online divisions and still turn a profit.

Still, the bright spot for the company remains its Server and Tools division. Not only did it grow revenue from the year-ago quarter—at an increase of about $230 million, it was the only division to do this—but it actually increased its profits significantly in doing so. Income was up by over $260 million. This division typically doesn't have the profit margins of Business and Client, so the fact that both these numbers are up is great news for Microsoft, since this division is rapidly approaching the revenue levels of these other two groups.

Excluding the one-time charges, the results were roughly in line with expectations, and Microsoft's stock has risen slightly in after-hours trading since the announcement. A key question is how the company expects the rest of its fiscal year to go; its earnings release offered little guidance, but we'll update the post if its press call does.

UPDATE: During the conference call, Microsoft said that what it terms annuity sales, the subscription to software by businesses and other institutions continues to be strong. That's a good thing, given that sales of new hardware to business are very slow. According to its sales figures, the PC market excluding netbooks actually dropped in the neighborhood of 15 percent year-over-year.

The company also had good news from the Xbox 360. It sold 1.7 million of them this quarter, a growth of 30 percent year-over-year. That already leaves it ahead of last year's sales with a full quarter to go.

As far as the general economic conditions, the company sees no sign of things picking up based on the trajectory of sales during the quarter, and is approaching the rest of the year with caution as a result.